A disagreement to resolve please. Deceased had losses in the year of death greater than gains and so they can be carried back against earlier year gains. Is this taken into account when calculating the final tax position at the date of death for IHT purposes? Opinions differ.
The IHT charge is based on a notional transfer of value, of the deceased’s net estate, immediately before death. The IHT statutory assumption is that he is not dead at the relevant fictional time. The right to carry back losses beyond the current year in s62(2) TCGA 1992 does not accrue to a person who is not actually dead so to my thinking it will not have accrued at the relevant fictional moment in time before his death, so any consequent repayment of CGT derived from that right does not form part of his IHT estate.
The Inheritance Tax Act 1984 allows a claim for the value of an estate at death to be reduced by the amount of the loss (see IHTA 1984, s179, and s191).
Where IHT relief is claimed in respect of a loss on the sale of quoted shares within one year of death, the value used for IHT purposes will be treated as the base cost of the asset for CGT purposes.
Thanks Jack. An interesting analysis which I will share with my colleague.
Thanks Francesca but here I am referring to losses prior to death which can be carried back to reduce CGT in earlier years.
TCGA 1992 s 62(2) provides;
“(2) Allowable losses sustained by an individual in the year of assessment in which he dies may, so far as they cannot be deducted from chargeable gains accruing in that year, be deducted from chargeable gains accruing to the deceased in the 3 years of assessment preceding the year of assessment in which the death occurs, taking chargeable gains accruing in a later year before those accruing in an earlier year”.
The PRs may make a claim to carry back the allowable losses. These losses are offset against gains of the deceased made in lifetime and on which CGT will have presumably have been paid. The offset of the losses will give rise (presumably) to a repayment of the overpaid CGT.
The PRs are effectively standing in the shoes of the deceased and any repayment seems to me to then belong to the deceased’s estate for IHT.
But when does the loss arise which creates the repayment? It is, net of gains, a loss of the tax year of death but does not arise, may never arise, unless the deceased has died and the PRs claim. He will not have, and they will not have done so, at the time the estate falls to be valued for IHT i.e. “immediately” before the death. The timing of the valuation is a deeming provision and though these can be unpredictable in their ramifications the effect here seems clear to me. Death may give rise to the accrual of other assets/liabilities/claims but the deeming excludes those too. This is apparently the rationale behind s151(2) IHTA.
A loss arises at the date of the disposal of the asset and thus prior to death irrespective of whether the deceased has died and irrespective of any claim by the PRs.
To the extent that the loss exceeds gains of the same tax year allows the PRs on or after death to claim/process any appropriate tax refunds; the entitlement thereto having arisen prior to death.
The loss arises before death but the right to carry it back 3 years is not vested until the moment of death
I have to say I agree with Malcolm on this.
As I understand it the key issue is whether the repayment generated by the loss claim is an asset of the estate for the IHT death charge. IHTA s171 may perhaps apply here. An analogy may be drawn with a life assurance policy owned by the deceased that has only a market value at the moment before death within s4 but on death gives rise to a sum payable. HMRC’s view in IHTM04046 is that this increase in value is within s171 (2).
The question is whether the CGT 3 year carry back claim under s62 (2) TCGA that arises to the deceased only if and when he dies is either an addition to his estate or an increase in the value of an existing asset which has occurred by reason of the death. The former may be arguable though surely not the latter. The case of Arkwright  EWHC 1720 (Ch) shows that the analysis is not always straightforward and depends on the facts and the subject matter.
If the successful CGT reclaim is not counted in due to microsecond timing issues, is the answer the losses are an asset of the deceased which have equivalent value to the tax reclaim?
The allowable losses in question are not eligible for carry back unless and until the deceased dies. Their availability does not exist until then so immediately before death they are not an asset in the estate. s171 may override that. Though not entirely uncontroversial the valuation approach immediately before death is that the deceased’s imminent death is not to be assumed so the losses are not assumed to become available as if they were a form of contingent asset.
In my earlier response I didn’t mention s 171 but I did take the view that it would apply on the grounds that the tax refund is “an addition to the property comprised in the estate” and “[occurs] by reason of death”|.